I heard a story recently on NPR about a drug that suddenly started killing people during some super-late phase trial - like, almost to market. And the story mentioned how many tens or hundreds of millions of dollars this was going to cost the company - all the years of heavy investment down the drain, plus then the liability - and I thought, who else could absorb such risk? If we didn't have Big Pharma, we'd have to invent it in the form of insurance companies or an investment group or something - which, of course, would remove the producers from free market pressures, and would kill the creativity and pragmatism of the industry, resulting in fewer drugs and much more pain and death...

What I want to know is why American pharmaceutical companies are willing to give bulk discounts to Canadians, Europeans, the Japanese... pretty much everyone. But it's immoral for Americans to ask for the same deals...

Another point, regarding this:

How sick I get of leftist hate-mongering, such as the ritualistic portrayal of big oil or pharmaceutical or defense companies as "greedy" and evil and corrupt. That stuff is just stupid shit, and the people who come out with such blather are living in lies.

My wife made me watch the movie Absolute Zero recently, mostly for the amusement of watching me squirm over the utterly absurd science. And yes, the science was so far beyond laughable that it can best be described as "sad" - but what annoyed me the most was realizing just how tired the writing was. The noble scientist walked out of his super-important meeting, because there was a guy in uniform there, and as he explained, "I said no military."

And I just thought (and yelled out loud), you dumb-ass motherfucker. This man would probably lay down his life for you, here on the spot. He probably served in combat somewhere to defend the country - judging by his age, maybe in Lebanon, maybe in Grenada, maybe in Honduras or Panama or the first Gulf War. His interest in your project is to defend and protect us. And you're treating him like he's evil incarnate. It's so out-of-joint with reality, it's just concussive and jarring...gah.

And besides that, the plot is just so tired, so 1970's...the first time a movie portrayed Big Pharma as the greedy power suppressing research, that was probably interesting. But come on...it's like having Martians for bad guys, it's just that the writers don't seem to know it yet. Aargh...

Andrew,
It's not immoral, it's stupid. Those coutries are not "receiving bulk discounts," they are using monopoly buying power to force the drug companies to sell at a price that doesn't reward them enough to justify the risks of research.

How many new drugs come out of Canada? NONE. How many out of Europe? Less and less. Japan? A joke. That's because you oh-so-morrrrrallll lefties are "protecting" the people of Canada and Europe from the eeevvvil profits of immoral big drug companies.

The whole world is freeloading on the people of the US (and Israel) because we are the only places that still allow the profits that lead to research...

Wait until you or a loved one is saved by some expensive new drug, and pause a moment in your denunciations of capitalism and reflect that you are subsidizing some Canadian who's getting the same drug below its real cost. And that if the stupid socialists you reflexively support were running things, that drug probably would never have been invented, and you would be dead.

Actually, it IS immoral. Socialism is theft. And is just as much theft to steal from the richest country in the world as it is to steal from a poor widow.

Also: If the companies are selling below-cost, why are they selling at all? The argument is absurd on its face. The plain fact is that for pharmaceutical companies, manufacturing costs are negligible, and R&D costs are minuscule compared to marketing costs. ..

Thanks for the Drucker links John. I can't believe I hadn't read them before - they are brilliant.

They are not selling below the cost of producing the drugs. They are selling below the cost that justifies the huge expense of research and testing.

It would be like me buying a new machine to produce a new type of cabinet, and charging customer A enough to cover the cost of the machine, as well as my other expenses. Then I make another one, and sell it to customer B for much less, because the machine is already paid for.

That's fine, unless B has some way to force me to sell to him at a lower price, when I would prefer to spread the cost of the machine over both customers---then he is stealing from me, and indirectly from A, even though I make a "profit" on the sale.

"and R&D costs are minuscule compared to marketing costs..."

I think that's wrong. Anybody have the figures?

Andrew wrote:

>What I want to know is why American
> pharmaceutical companies are willing to give bulk
> discounts to Canadians, Europeans, the
> Japanese... pretty much everyone.

The pharmaceutical companies are not willing to give bulk discounts to "pretty much everyone" -- they are forced to by socialist governments. Drug prices in Canada are set by a government board, and those prices are set to cover the marginal cost of producing and distributing drugs *in Canada*, not the total cost of developing and testing the drugs in the first place. Thus, the Canadians are paying for the *marginal cost* of their drugs. Probably the same thing is happening in Europe and Japan.

> But it's immoral for Americans to ask for the
> same deals...

It's not immoral to ask, but it is immoral to force, and it's impossible for the pharmaceutical companies to give. Because almost everyone else is paying only the marginal cost of their drugs, Americans have to pay higher than average cost, because someone has to pay for the research, development, and testing. If Americans refuse to pay this cost and insist on paying only the marginal cost like everyone else, then no new drugs will be developed. *Someone* has to pay for R&D.

> Also: If the companies are selling below-cost,
> why are they selling at all?

They are selling in Canada below the average cost but above the marginal cost. So long as Americans pay for drug R&D, it is profitable for the drug companies to sell drugs to Canada in this fashion.

Pretend you're about to take an airplane flight, that the airplane holds 100 passengers, and that the cost to the airline of making the flight is $10,000. Thus, the average cost per passenger on a plane with a full load is $100. Because the airplane is rarely completely full, and because the airline wants to have a profitable flight even with a less-than-full plane, the airline will sell tickets for $125 each.

Assume 90 passengers buy these $125 tickets (let's call them "Americans"). The airline takes in $11,250 in revenue from the "Americans" and makes a profit of $1,250 on the flight (a 12.5% profit margin). A half hour before take-off, when the airline realizes no more $125 tickets will be sold, it begins to sell the remaining ten tickets to poor college students flying standby (let's call them "Canadians") for $50 each.

Since the airline will be making the flight regardless of whether any "Canadians" buy any cheap $50 tickets, the additional ("marginal") cost of carrying the "Canadians" is quite low (probably only a few dollars). Thus, the airline makes a profit on these $50 tickets, even though the average cost per passenger is $100. Yes, a ticket can be both "below (average) cost" and "profitable (above marginal cost)" at the same time.

So why don't the "Americans" all fly standby and buy those cheap $50 tickets? The airline won't let them, and can't. If everyone paid only $50 for his ticket, the airline would have a revenue of only $5000 for the flight, well below the cost of $10,000. The airline would cancel the flight if the "Americans" insisted on paying "Canadian" prices. Either that or go out of business.

The same holds true of the drug companies. It's just basic economics, which in this case boils down to just simple arithmetic.

Mike

Some other points that I think Andrew has overlooked:

First point:

The costs of bringing new drugs to market are very high in this country because of the testing requirements and regulatory hurdles put in place by the FDA. The bureaucrats tell us that these tests and regulations are there for our safety. If those tests and regulations were merely moderate in scope and rigor, the bureaucrats would be right. But sometimes the tests and regulations are too broad in scope and too rigorously applied, made so by the natural bureaucratic (and human) desire to NOT get blamed for a new thalidomide scandal. And so drugs that might help people either don't get to market in a timely fashion, or the costs of compliance are so high in relation to any income that might be derived from the drug that the drug never gets to market at all, whatever its virtues and manageable side-effects.

"How is that a cost?" I hear you ask.

Well, the drug companies are out a bunch of bucks they may never recover, or recover only at the expense of the general public through higher-than-otherwise prices on the drugs that DO make through the FDA's obstacle course.

Also, there's a cost in the form of human pain, suffering, and premature death. Thanks to the overly-rigorous procedures laid down by the FDA, drugs that might help people often don't get to market in time (if they get there at all) to save people from said pain, suffering, and death. Basically, the FDA is telling competent adults ("Competent? What do they know? What standing do they have in this matter?" the bureaucrats sniff) that they can't be trusted to gauge (with the help of a physician) the risks of taking a drug that might save their lives. "Why, that not-fully-tested drug might so damage their heart valves that they'll die of congestive heart failure in twenty years!", the bureaucrats wail, never mind that the patient is in danger of dying in a few months from, say, kidney failure, a fate the the drug may avert.....

In short, a case can be made that the FDA has inflicted misery and death on hundreds of thousands of people in an effort to save a few thousand lives.

Second point:

The folks who piss and moan about eeeviiiillll drug-company profits forget where those profits go.

As John and the others point out, much of that "profit" really isn't profit, in the sense of going into someone's pocket-- the money gets plowed back into the companies' research efforts, the better to bring new and better drugs to market more quickly.

But some of that profit does go into someone's pocket, and one of those pockets belongs to my mother. She and my late father worked for years, saving their pennies, and bought (among other stocks) a sizable chunk of a well-known drug company. My mother is old now (78) and is dependent on her investment income for her stay in the nursing home. If the know-nothings succeed in hammering drug-company profits down to zero (or worse), one of the consequences is that my mother's finances get hammered too. And by extension, my finances and my sister's finances get hammered, because we'll have to pick up the slack, and my $25,000 annual income means that I ain't rich.

So if one "sticks it" to the eeeviiilll drug-companies, just who is getting screwed? Some corporate fat-cat who lights his cigars with $100 bills? Or millions of retirees and their children? Have the know-nothings ever thought that far? I doubt it.

John,

Sorry about the coarse language. I can only plead a low tolerance for foolishness, and "eeeviiilll drug companies" is one of my "hot buttons".

^_^;;